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Production lines

Simon Haskel on the need for a genuine long-term economic plan

There is one magic ingredient which if inserted into our economy would raise pay, increase income, raise the tax intake, reduce welfare cuts, increase exports, raise our standard of living, and cut the deficit.

And that ingredient? Productivity.

The Coalition government does not see this because it has a one sided view of the economy. By concentrating on total GDP, they hide the fact that per head this 1.8% lower than it was in 2008. The total has gone up only because of population growth. But the output per person is 1.8% lower.

The Chancellor took pride last week in the fact that more jobs were created in Yorkshire than in the whole of France. What he didn’t tell us is that four people in France produce as much as five people in Yorkshire. And the latter work longer hours. Perhaps this is because the French taxpayer is reluctant to subsidise low wages.

In raising these matters, some accuse Labour of not being business friendly. Not true. The wider interests of business are not served by leniency towards dubious activities by companies, special treatment for powerful lobbies, or subsidies that compensate for poor management. They are served by a clear business strategy, especially one that aims to raise productivity.

Ministers have tried to have a business strategy – one consisting of helping exports, encouraging those sectors which show promise, and innovation stimulus centres. But these initiatives could work a lot better with increased productivity. The two are interdependent.

So what should be in the government’s latest (337 page) Finance Bill to deal with this?

Jonathan Portes, Director of the National Institute of Economic and Social Research said: “The question is what should the government do? It should go hell for leather on doing whatever it can to boost productivity like infrastructure, investment and housing. We should be throwing the kitchen sink at it”.

But what makes Portes call more urgent is this. The Chancellor says that unemployment has fallen to 5.5%. We are reaching the unemployment norm and this means that future growth depends on raising our productivity. Indeed, without growth in productivity, we will continue to see both rising inequality and rising immigration - maybe reaching a point where things could get quite nasty.

A strategy for productivity means planning for the long term. Not changing grants and tax allowances, but spending evenly spread. Not what the OBR calls a roller coaster profile for public spending – a big drop followed by a big rise.

If the government really wants to be business friendly, what about another ten year plan for science – something that the last Labour government put in place. Raising the proportion of GDP we spend on research to that of the US, Germany or France, and taking advantage by introducing long term values into our business culture.